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Altria Group Inc. (MO) posted a decline in first-quarter profit, but earnings from continuing operations actually increased 5.4 percent to 39 cents a share from 37 cents a year earlier. The largest U.S. tobacco company had to walk a fine line in the quarter, increasing prices three times to help offset a drop in cigarette shipments related to an upcoming 62 cent per pack increase in the federal excise tax (FET) on April 1.

"Altria delivered solid business results in the first quarter in a challenging economic environment," said Michael E. Szymanczyk, Chairman and CEO of Altria. Results matched analyst estimates as compiled by Bloomberg, but beat Reuters' estimate by a penny.

Net revenues for cigarettes decreased eight percent to $3.9 billion as Philip Morris USA's domestic cigarette shipment volume declined 14.2 percent to 34.4 billion units compared to the prior-year period. Wholesalers and retailers reduced inventories in the quarter in anticipation of the tax increase on April 1 to minimize floor tax payments. Marlboro's own volume -- like the rest of the brands -- declined by 12.4 percent, but its retail share grew. In April, though, retailers began to rebuild their inventories of PM USA's brands.

Offsetting the lower volume were list price increases and lower promotional allowance rates. Operating companies income (OCI) for cigarettes increased by 10.7 percent versus the prior-year period to $1.2 billion. As it said it would, the parent of the Marlboro brand lowered Selling, General and Administrative spending, thus increasing margins by 5.7 percentage points.

Then there is the $10.4 billion UST acquisition completed in January, which Szymanczyk said "is proceeding very well." Aiming to bolster revenue growth from smokeless products, Altria acquired UST as cigarette shipments and sales have been on steady decline for years. But the smokeless products, including wine, have all seen volume declines as well in the quarter.

Altria reiterated its 2009 forecast, adding it would cease production at its Cabarrus cigarette manufacturing facility and complete the consolidation of manufacturing capacity into its Richmond facility by the end of July 2009. This decision, again, was made to address ongoing declines in U.S. cigarette volume.

But can cutting costs, shutting plants and expanding into smokeless products really help the tobacco giant? With increasing cigarette taxes and higher health awareness, Americans have been smoking less and less. Fitch Ratings expects volume declines could accelerate and reach lower double digits this year.

On the one hand, then, the tobacco sector has fared better than others during these difficult economic times, with Altria even being one of the few to raise dividend this year. On the other, perhaps the U.S. is not the place to be for investors in the sector. Companies with diversified international operations -- where some areas are still seeing growth -- would be a better option. Phillip Morris (PM), which was spun off last year, is one example, although it could be largely impacted by currency moves.